The IMF has released its 2011 Global Financial Stability Report which summarizes the fund's view on the causes for ongoing market instability and proposes some solutions on how to continue. Not surprisingly, the IMF sees the key threat as follows: "The main task facing policymakers in advanced economies is to shift the balance of policies away from reliance on macroeconomic and liquidity support to more structural policies—less “leaning” and more “cleaning” of the financial system. This will entail reducing leverage and restoring market discipline, while avoiding financial or economic disruption during the transition. Thus, ongoing policy efforts to withdraw (implicit) public guarantees and ensure bondholder liability for future losses must build on more rapid progress toward stronger bank balance sheets, ensuring medium-term fiscal sustainability and addressing excessive debt burdens in the private sector." The key issue here is that as the IMF correctly observes household leverage, still at unsustainable levels, continues to be a threat to the financial system (despite aggressive attempts to transfer leverage from the private to the public sector) and may further weaken banks (but not if one listens to JPM - it's all unicorns and rainbows there). Yet the scariest news: "Global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years." But that's ok- these banks will focus on funding US Treasury issuance first, ergo no need for more QE...
Among some of the report findings, which will hardly be deemed shocking:
- Some stress tests should have higher capital hurdles
- Some Portuguese banks have low capital levels, and funding costs in Spain and Portugal to rise through 2015
- Banks in Austria, US and UK have high loan losses (really? that's news to Jamie Dimon et al)
And most importantly:
Global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years. Bank debt rollover requirements are most acute for Irish and German banks, from 40 percent to one-half of all debt outstanding is due over the next two years. These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources.
It gets worse:
A number of banks in Europe—including nearly all banks in Greece, Ireland, Portugal, many of the small and mid-size Spanish cajas, and some German Landesbanken—have lost cost-effective access to term funding markets. As a result they have turned in varying degrees to repo markets and the ECB for refinancing. But there is still a risk that, in the event of further negative news, a greater number of institutions could face difficulties in rolling over their wholesale funding.
Investor demand for bank debt is falling, reflecting not only underlying vulnerabilities but also changes in the structure of the markets...
Increased wholesale funding costs have, in turn, led some banks to bid for deposits in an attempt to bolster their secure funding base. The fierce competition for deposits, in part due to the excess capacity in banking systems, leaves institutions vying for a limited pool of depositors and in some cases has driven up deposit rates paid in new business.
The rise in the cost of marginal wholesale and deposit funding—along with lower interest income—has led to a squeeze in net interest margins in some economies (Figure 1.11). This has occurred because increases in second-tier bank funding costs have little impact on the benchmark market rates used to price their loans.
In other words, Europe is crippled and soon enough the cost curve will invert, forcing even more banks into the gentle hands of the ECB and the IMF.
Much more in the full report below.IMF GSFR